WASHINGTON (March 10, 2010)- Legislation that would create a federal backstop for catastrophic bonds issued by state guaranty funds could ultimately expose the taxpayers to further risk and damage reform efforts at the state level, the National Association of Mutual Insurance Companies (NAMIC) said Wednesday.

In testimony submitted to a joint hearing of two House Financial Services Subcommittees on H.R. 2555, the Homeowners Defense Act, NAMIC outlined its concern that the bill attempts to expand the role of government such that it could distort the private market.

“While the private sector and government can and should work together to address problems of insurance availability and affordability in these areas, government intervention should not supplant the economic principles affecting the complex relationship between supply, demand, and price,” NAMIC said in the testimony.

Just as important, NAMIC argued that establishing a federal backstop for state catastrophe plans would remove an incentive for states to address the issue themselves. Already states such as Florida and North Carolina have taken steps to reduce the exposure of their catastrophe plans and move towards actuarially sound pricing for coverage.

“If Congress enacts legislation that encourages coastal states to adopt and enforce stronger building codes, and to curtail further development of ecologically-sensitive coastal areas, it can slow the growth in coastal catastrophe risk exposure,” said Kathy Mitchell, federal affairs director for NAMIC. “On the other hand, if Congress enacts legislation such as the Homeowners Defense Act, it will reduce the incentive for coastal states to adopt risk mitigation and avoidance policies by creating mechanisms for spreading coastal zone catastrophe risk to insurance policyholders and taxpayers in other states.”

Mitchell said that by allowing states to move their exposures to the federal government rather than addressing the issue, the bill would ultimately hurt those it seeks to protect.

“In sum, this legislation would create a permanent federal role in the private insurance markets without addressing the real danger for people living in catastrophe-prone areas,” she said. “Instead of shifting the burden of catastrophic losses to the taxpayers, we believe that Congress and the American people would be better served by passing legislation to encourage stronger building codes, disaster mitigation, and better land-use in coastal areas.”